What the ad numbers mean for online and social media October 3, 2011

While there’s renewed interest in paid content, advertising pays the bills for most social and online media companies. Last week the Internet Advertising Bureau published U.S. online ad sales figures for the first half of the year. Revenues grew 23 percent to $14.9 billion, showing online to be one of the healthier sectors in all of advertising, even in a lousy economy. What’s less encouraging is that display ad pricing is actually down, and companies can’t escape the grip of cheap ad inventory aimed at direct marketing. Let’s take a closer look at the numbers and evaluate some possible solutions to maintain growth and increase profitability.

Here’s what the numbers mean for those selling online ads:

Growth by category. According to the IAB and its data partner, PricewaterhouseCoopers, both display ads ($5.5 billion) and paid search ($7.3 billion) grew at 27 percent rates. Online video ads ($891 million) are growing even faster, while classifieds and email are down. The bottom line? Good growth but no big structural changes.

Pricing. That lack of change is reflected by a slight decline in display ad pricing — CPM is down 5 percent. Display growth came from volume, not price increases. Pricing pressures, along with the continuing dominance of cost-per-click (64 percent of sales) show that online isn’t really poaching dollars from brand-related TV advertising budgets.

So what’s the outlook for the rest of the year for ad sellers? Given the new IAB figures, I expect existing full-year growth forecasts will be raised by 1 to 2 percentage points. Even with no signs of an economic recovery, fourth-quarter sales are usually the strongest of the year, and election spending will start early. EMarketer projected 20 percent growth for the full year, with display growing a bit faster than search. MagnaGlobal forecast 16 percent growth overall.

As for pricing, using inventory optimization tools raises the yield, or price per unit, by enabling better forecasting, targeting and reduced discounting. One such optimizer, Yieldex, just raised $10 million. Likewise, sites with higher-quality content or specialized audiences can raise CPM rates by participating in private exchanges or ad networks like Glam Media’s. Even the big guys like Yahoo and AOL are building premium exchanges, though, so it’s likely to get crowded.

It’s not getting any easier to steal dollars from big TV brand advertising budgets – even online video just doesn’t have the audience scale. Instead, online ad sellers should look to complement traditional media buys. That means working on multiscreen campaigns and using social media to “amplify” messages across media. Another complementary use of social media is to pretest the creative content of advertising messages to ensure the efficiency of print or TV buys. Social media analysis will help sell those complementary ads. Through such analysis, Networked Insights, which recently raised $20 million, says it helped a client buy cheaper TV ad inventory to reach the same audience as it switched channels.

Companies selling online ads need to adopt these yield management and analysis technologies and combine them with the selective use of networks and exchanges. They may also have to offer additional services — e.g., audience and ad performance analysis aimed at media buying agencies, which can be a drain on resources. But by doing so, they’ll get more than their fair share of spending and will hold off price erosion.